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Managing Global Supply and RiskBest Practices Concepts and StrategiesLlewellyn Roberts, Adjunct Faculty

Gordon Institute of Business Science

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Agenda for Today’s Presentation

Global Business Logistics

Changing Political, Legal & Economic

Environments

International Supply Issues & Risks


Agenda for Today’s Presentation

Managing and MitigatingRisk

Global Supply Success Factors & Best Practices

Future Directions


• Important issues to consider:

– To gain a competitive advantage, global sourcing & supply is a given for companies engaging in global marketing strategies.

– The longer the supply chain, the more cooperation and coordination is required between production, marketing, purchasing and the logistics management group.

Global Business Logistics


• World trade continues to grow as fast logistics systems have had the effect of shrinking the world, empowering competitive trade

• Foreign trade has grown in tonnage and in value for the United States and other nations

• Lower labor costs from international outsourcing is still a critical component of the global supply chain

• Focused manufacturing fits well into an international logistics strategy

The Magnitude of Global Logistics Activity


• Trade barriers continue to fall, accelerating global business activity

• Global markets result from the general homogenization of global needs and wants:– Local needs suborned to lower-priced, higher-quality products.

– Preferences for international products can also be related to attempts to copy other more prosperous cultures.

Global Markets and Global Corporations


• To effectively serve global markets, leading firms have adopted integrated worldwide sourcing strategies

• These firms search for “best locations” in global sourcing for materials and components, depots, assembly, distribution centers, and logistics

• Leading global firms typically design synchronous strategies around technology, marketing, manufacturing, and logistics

Global Competitive Strategy


1. Marketing becomes standardized yet customized

2. Product life cycles shorten, sometimes to less than one year

3. Outsourcing and offshore manufacturing are becoming more prevalent

4. Marketing and manufacturing activities and strategies tend to converge and be better coordinated in firms operating globally

Customer Service Strategies for Global Markets: Four Characteristics


• Logistics networks tend to become more expansive and complex

• Thus, lead times and inventory may rise

• Logistics activities must be operated as a system

• Most importantly, the service needs of internationally-dispersed customers must drive the design and implementation of the logistics system

Customer Service Strategies for Global Markets


• Longer pipelines in distance and time

• Increased risk (damage, theft, etc.)

• Reduced ability to plan due to longer cycle times

• Delivery window variability

• Different shipping terms

• Increase in supply chain “touch” points and handlers

• Increased use of agents and other third parties

Supply Chain Logistical Issues


• Asia & “State of Play”• Russia & Eastern Europe & “State of Play”• Latin America & “State of Play”• Challenging Geographies & the World Economy

– Greece– Middle East– North Korea– USA?

• New Directions– VISTA– Emerging Africa

Changing Political, Legal & Economic Environments


• Managing the Geographic Evolution of Supply Chain Activities – Need to take advantage of “core competencies” of specific geographies– Focus on “lowest net landed cost” for the customer/consumer

• Transformation or Redesign of “Best” or “Proven” Practices to Global Supply Chain Setting– Recognize challenges unique to global objectives– Achieve end-to-end process integration and shipment visibility– Design for supply chain agility– Involvement of capable facilitators to achieve desired success

• Leverage Global Supply Chain Strategies to Significantly Impact Overall Business Strategies

Global SCM:Key Areas of Greatest Need


• Planning flexibility• Follow-up complexity• Procurement complexity

Customer• Demand-driven

planning• Varying market

requirements• High warehousing

cost Supplier• Complex labor environment• Inbound inefficiencies • Limited manufacturing skills• Quality issues

• Long lead times • Transportation

quality• Logistics costscosts

Information Flow

Physical Flow

Source:

Global Operations Require High-Performance Supply Chains


� To gain a competitive advantage, global supply chain management & sourcing is a given for companies engaging in global marketing strategies

� The longer the supply chain, the more cooperation and coordination is required between the various groups in the supply chain

Key Challenges


Keep in Mind – Things are Sometimes Very Different in Other Parts of the World !!!



• Firms involved in international supply management must manage a range of issues beyond domestic supply management…– Cultural differences– Different legal systems– Total cost calculations– Expanded organizational design requirements– Currency risk management– Countertrade demands– Information requirements– Logistical issues



• Firms involved in international supply management must manage a range of issues beyond domestic supply management…– Documentation requirements– Changing geo political climates– Local and regional economics – Quality & traceability– Secure supply chains– Language and communication barriers


• In a message dated 3/15/2012 11:30:36 P.M. Eastern Daylight Time, bill.huang@writes:Hi Lew,Since the payment will be wired from GSCM Shanghai Office, we need to update the agreement attached for payment. I just changed the company title.Please check, sign and send it back to me. Thanks.Sorry for brining you incontinence.Regards,Bill

Language and Communication: Poor Communication?


• Environmental risks:– According to a recent Swiss study, worldwide economic losses from

natural disasters in 2010 totaled $194bn. – Natural disasters damage infrastructure, interrupt production, increase

commodity costs, and delay or curtail shipments, to name only a few. – An analysis of 15 multinational companies reported that operating

profits caused by supply chain disruptions fell by up to 33% in the quarter following the 2011 earthquake and tsunami in Japan.

– Because natural disasters are difficult to predict and impossible to prevent, companies must concentrate on actuarial and operational planning: making pre-facto investments to reduce vulnerability, increase network flexibility (redundant manufacturing/distribution, readily available supply alternatives, larger safety stocks, etc) and accelerate recovery.

The Nature of Global Supply Chain Risk


• Geopolitical risks:– A good example of geopolitical risk is terrorism. Since 9/11, the United

States has spent $1trn of people’s and companies’ tax dollars on homeland security.

– The costs of new industry regulations and requirements resulting from terrorism are also astronomical.

– In addition, businesses must worry that new security disruptions could further affect production or distribution hubs, and that such events would drive more legislation that could hamper supply chain effectiveness.

– Supply chain risk studies must address all these facets. – Like environmental concerns, companies are highly limited in their

ability to manage geopolitical disruptions or influence their outcomes. – Thus a dual approach—risk reduction and increased network

resiliency—is clearly called for.



• Economic risks:– Economic disruptions cover a huge range of issues, including currency

fluctuations, commodity price volatility and sudden demand shocks. – For multinational and local companies, border delays, export/import

restrictions, and ownership/investment restrictions are particularly big APAC risk issues.

– A study by the World Bank concluded that enhanced capacity in global trade facilitation—resulting, for example, from streamlined customs programs, minimized tariff and non-tariff barriers, more-rational quota systems and fewer infrastructure bottlenecks—would increase world trade of manufacturing goods by almost te10%.

– However, from a risk perspective, the greatest concern is the possibility of sudden new restrictions or delays.

– This in turn highlights the need for more advanced risk management policies and mechanisms in national border administration.



• Technological and infrastructure risks– Forty one percent of respondents to the WEF survey stated that their

companies have experienced disruptions as a result of unplanned outages of IT or telecommunication systems.

– Increased reliance on, and use of, IT solutions such as electronic data and analytics for real-time risk assessment (e.g. electronic manifests for cargo and advanced passenger information for air travel) have proven effective in facilitating movement of freight and people.

– However, these advances concurrently put more pressure on governments and businesses to maintain robust and secure information and communications networks.

– Similar to technological concerns, infrastructure failures—from roads to power stations—are subject to greater risk due to everything from lack of investment to terrorism.

– A report by CIBC World Markets estimates that total infrastructure spending will need to reach between $25trn and $30trn USD by 2030


Tweet your questions to the speaker LIVE @SmartProcureProbability

Sev

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1 2 43

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Risk Mitigation-Measuring The Impact of Risk


Sev

erity

Low

Low

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Operational Risk

Risk Category

High

1

3 4

2

8

9

10

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5

12

11 7

6

Terrorism or Political

Instability12

13

14

Natural Disasters

Financial Risk



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Develop ContingencyPlans Proactively

Build in Flexibility

Day to Day Management

Risk Mitigation

Adapted from Christian Verstraete, “Share and Share Alike” CSCMP Supply Chain Quarterly, Quarter 2 2008, p.34.



Risk Mitigation-Measuring the Impact of Risk


Attribute Scale Measure

Severity Minor to Massive Lives, Injuries, Fear, Doll ars, Performance

Duration - Impact Minutes to Years Time

Geographical Local to Global Square Miles and Boundar ies

Detectability Easy to Difficult Warning Systems and A wareness

Frequency Low to High Historical vs. Concern

Wind, Water, Disease, Fire, Explosion, Contamination, Radiation, Terrorist, Environmental, Public Health, Social

& Other SC Disruptions-Intentional/Unintentional



SUPPLYNETWORK INTEGRATED

ENTERPRISEPRODUCT/SERVICE

DISTRIBUTIVENETWORK

Information, Product, service, Financial, and Knowledge Flows

MATERIALS

CUSTOMERS

© 2009 Bowersox, Closs & Cooper Logistical Management 3rd Ed

HumanResource

Management

FinancialStewardship

CustomerRelationshipManagement

OperationalManagement

Integrated Organizational Frameworkmonitoring suppliers and sharing information


Food Item Severity – Example

Weight Severity Factor

40% Microbiological Factors• Listeria, Salmonella, -----

30% Chemical Factors• Chlorine, Acrylamide, ------

10% Country of Origin• Each country has a severity factor associated with it

10% Vulnerability Group• Infants, Elderly, Medical, Healthy Adults, General

Population

10% Consumption Rate• Amount of product used (Low, Moderate, High)

Each food item (milk, carrots) is issued a severity factor based on an algorithmAnd it is associated to a supplier

Using a look-up table, the severity calculation results in an Integer –which is then translated into severity term

� 1 – 20 total score … 1 ... Negligible� 21 – 40 total score … 2 … Moderate� 41 – 60 total score … 3 … Critical� 61 + total score … 4 … Catastrophic


Supplier Severity – Example

Weight Severity Factor

50% Food Items** being supplied by supplier• In the case of multiple products, takes highest risk

20% Complexity• A subjective measure (Low, Medium, High, Very High)

30% World Region• Auto-assigned based on supplier region

• Each supplier can be assigned a severity factor based on a configurable algorithm• Any number of factors can be incorporated into the algorithm• Ultimately the supplier receives a numeric score, which can be translated into a text descriptor

Using a look-up table, the severity calculation results in an Integer – which is then translated into severity term

� 1 – 20 total score … 1 ... Negligible� 21 – 40 total score … 2 … Moderate� 41 – 60 total score … 3 … Critical� 61 – 80 total score … 4 … Catastrophic

**Food Risk is calculated separately based on another set of assumptions


Supplier Probability – Example

The probability of a supplier failing can be measured by any number of factorsIncluding data from other systems via integrations

Using a look-up table, the severity calculation results in an Integer – which is then translated into probability term

� 1 – 60 total score … 1 ... Frequent� 61 – 70 total score … 2 … Likely� 71 – 80 total score … 3 … Occasional� 81 – 90 total score … 4 … Seldom� 91+ total score … 5 … Unlikely

Weight Probability Factor

30% Previous Audits over last 365 days• Average of the audit scores (in percentages) up to 100

30% Consumer Complaints received in past 30 days• Deductive method, start with 100 and subtract 10 points

for each complaint

40% Lab Test Results• % of unfit samples (out of spec results)


Supplier Risk – Food Industry Example

• Food Item Risk• Complexity• World Region

Supplier Severity

•• Previous Audit Results• Consumer Complaints• Lab Test Results• Survey Results

Supplier Probability

• SeverityFood Item Risk

Extremely High

High

Medium

Low

Supplier Risk Matrix Updates Dynamically

Alerts, Actions based on Current Risk

Probability of Occurrence

Sev

erity

of P

robl

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Frequent Unlikely

Neg

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atas

trop

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• Supply Networks are often more global and complex with greater challenges and risks

• Effective risk management-mitigation requires use of formal audits/inspections, capturing CRITICAL METRICS of supplier/customer performance, reporting non-compliances , and follow-up

RESULTS:

IMPROVED COMPETITIVE ADVANTAGE AND

OPERATIONAL SUSTAINABILITY

Key Take Away Points-Supply Risk Measurement & Mitigation


• Increased emphasis on doing business with suppliers with global capabilities

• Global supply management will shift from component sourcing to subsystem and system sourcing

• Cost pressures will encourage an increased emphasis on emerging supply markets

• Continued refinement of a global supply management process

Where do we go from here? We expect…

Global Sourcing Future Directions


• Developing or obtaining human resources with the ability to view the supply network from a worldwide perspective

• Developing global performance and risk measures that link to a firm’s financial measures

• Establishing integrated systems between worldwide units and with suppliers

• Evolving beyond global contracting to sourcing process and practice consistency across sites

Where do we go from here? We expect…

Global Sourcing Future Directions


Questions?

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